Old money: Indonesia beyond cronyism

May 14, 2018

Former President Soeharto (centre) with two of the most well known “cronies” of the New Order era – Bob Hasan (left) and Liem Sioe Liong (right).

One of the most notorious aspects of the authoritarian Soeharto regime (1966-1998) was the privileges enjoyed by a small number of favoured business tycoons who were able to harvest extraordinary economic rents from monopolies and contractual rights.

Most prominent among these “cronies” (konco) was Soeharto’s long-time business associate, Liem Sioe Liong, who after 1966, assembled a huge business conglomerate, the Salim Group. “Bob” Hasan (The Kian Seng), who controlled the Kalimanis conglomerate and managed many of the Soeharto family foundations through the Nusamba group, was a foster son of Soeharto’s mentor, General Gatot Soebroto. Others were Soeharto family members, such as half-brother Probosutedjo and cousin Sudwikatmono.

Until the 1980s, these four men, two ethnic Chinese (The Kian Seng changed his name to Hasan when he converted to Islam) and two close Javanese relatives of Soeharto, controlled most of the commanding heights of the Indonesian economy. Thereafter, it became more complicated as the president’s own children went into business and leveraged power.

Although there had been cosy relationships between politics and business before Soeharto, the cronyism of the New Order was a new phenomenon in post-independence Indonesia. During the democratic period (1950-1957), changes of government had been so frequent that relationships did not have time to mature into cronyism. After 1957, when President Soekarno was openly hostile to capitalism and capitalists, there was little scope. When Soeharto took over the presidency in 1966, he brought with him business associates who already enjoyed his trust. They had a head start on newcomers and Liem Sioe Liong, in particular, prospered. The stability of the regime over 32 years gave ample time for these relationships to evolve into an archetypal cronyism.

Nevertheless, there was a prehistory of cronyism. In the precolonial era, sultans and rajas awarded privileges to favoured merchants, usually foreigners, in return for their assistance in mobilising state revenue. Sometimes holding official appointment as harbour masters (syahbandar), these rich merchants were acknowledged as leaders of their ethnic communities but rulers could be confident that their economic power would not translate into political power at court. The parallel with the New Order is readily apparent and it rested upon the “othering” of the ethnic Chinese business community.

In the post-Soeharto era, business tycoons have flourished, and many enjoy close links with political leaders, but in popular discourse they are no longer identified as cronies. The obvious question is what happened to those cronies and their wealth. The less obvious, and perhaps more interesting question, is what has happened to the institution of cronyism. What changes since 1998 have transformed the relationship between power and capital and what new institutions have come into being?

Where are they now?

Liem Sioe Liong fled to Singapore in May 1998 after his house, bank and businesses were targeted by street mobs and he died there in 2012 at the age of 96. Although his Bank Central Asia (BCA) became a casualty of the financial collapse, the industrial and retail segments of the group survived. His son, Anthony Salim, expatriated the Indofood Group to Singapore to become a multinational corporation, while in Indonesia he expanded into small retail stores (Indomaret), oil palm plantations and urban property.

Soeharto’s cousin Sudwikatmono (b. 1934) died in Singapore in 2011. Although his personal holdings were not more than 5 per cent, he had served as president director of Liem Sioe Liong companies Indocement, Bogasari (flour) and Waringin Kencana (agri-business). He was also a businessman in his own right – he founded the nation-wide Studio 21 cinema chain (now Cineplex 21 group) and served as chair of various business associations. He sold his stake in Studio 21 in 1999 and much of his wealth was dissipated in the failure of his family’s Bank Surya but he was able to rebuild a business interest around Indika Energy, now managed by his son, Agus Lasmono.

Bob Hasan (b. 1931), former timber king and briefly minister of trade (1998), is still alive, although in frail health. His stronghold was the timber and plywood industry through his own Kalimanis group and as chair of the plywood association Apkindo. Hasan became the prime scapegoat for the corruption of the Soeharto era and was imprisoned from 2001 to 2004. His Kalimanis Group is now much diminished, while the interests of the holding company Nusamba were redistributed among the Soeharto children long ago.

Probosutedjo (b. 1930), Soeharto’s half-brother, died recently, in March 2018. His holding company, Mercu Buana, was privileged through import licences, most blatantly through the clove import monopoly shared with Hutomo Mandala Putra (“Tommy”) Soeharto, but he diversified into chemicals, glass, automobiles (Renault), property, contracting and even education (Mercu Buana University). Like Bob Hasan, Probosutedjo was convicted of economic crimes and in 2003 sentenced to four years jail.

The wealth of the Soeharto family and its former cronies has never been properly traced but a few generalisations can be made. First, a large part of Indonesia’s banking capital was destroyed during the financial crisis of 1998 and 1999. In subsequent restructuring, personal holdings were greatly diluted. Agri-business, industrial capital, infrastructure and property holdings survived largely intact. Industrial and plantation assets have mostly been vested in corporations with part-listing on the stock exchange. The opaque foundations (yayasan) of the Soeharto era are now outmoded, except for special purposes. All this has brought greater transparency but most “old money” is vested in anonymous nominee holdings. The ownership of urban land is especially opaque and its value has escalated much faster than inflation.

Does cronyism persist?

Business tycoons still need political protection but in the democratic era the rules have changed, for several reasons. First, there is no longer overt discrimination against Indonesians of ethnic Chinese descent. Prominent businessmen are now public figures and may hold powerful positions as ministers, party leaders and even the former chair of national legislature (Setya Novanto).

Second, there is no longer a single power centre. Monopoly has given way to oligopoly. Democracy with coalition government means that power is now diffused among political parties, highly contested and very negotiable. Tycoons can therefore hedge their political bets and be less vulnerable to blackmail and extortion.

Third, private business has become socially respectable. Whereas a generation ago high school graduates still looked to a career in the public service, now they aim to go on to university and get a well paying job in the private sector. Entrepreneurship and innovation are seen as ways to get ahead. Tycoons are no longer overwhelmingly ethnic Chinese. The Bakrie and Kalla groups are two examples of large indigenous business groups whose heads successfully meld business and politics but there are also many new and up-and-coming players, especially in local regions.

Business magnates and political bosses therefore face a much wider range of choices as to how they interact and collaborate. Indonesian Corruption Watch chair Adnan Topan Husodo sees the new form of collaboration as one of “trusted allies” (orang kepercayaan) serving as de facto treasurers for political bosses.

For example, Hashim Djojohadikusumo, the former business partner of Titiek Soeharto (Siti Hediati Hariyadi), is the younger brother of her ex-husband Prabowo Subianto Djojohadikusumo, and is now the main fundraiser for Prabowo’s Gerindra Party.

Tycoon Aburizal Bakrie was not only the most powerful figure in the Golkar party but also a long-serving cabinet minister. His role as party boss was usurped by ethnic Chinese businessman Setya Novanto, who early in his career had partnered with Soeharto’s daughter “Tutut” Soeharto (Siti Hardijanti Rukmana) in a national driving-licence procurement contract. Almost two decades later, the logic of this informal deal inspired the Rp 5.9 trillion (US$424 million) national electronic identity card (e-KTP) project that resulted in a national scandal and Setya’s eventual conviction for embezzling US$7.3 million from the project.

Surya Paloh and Hary Tanoesoedibjo, formerly proxies for Soeharto’s children Tutut and Bambang Trihatmodjo, have now established their independence as party bosses of the National Democratic Party (Nasdem) and the Indonesian Unity Party (Perindo), respectively.

The Soeharto children are still influential, as are the children of cabinet ministers and generals, and these “princelings” can still leverage old money into new wealth. However, their former cronies are no longer compliant, nor dependent upon them. Tycoons are able to cultivate informal relationships with competing powerholders from different parts of the state according to what best suits their strategic or tactical interests.

Another instructive case has been the struggle for economic rents and slush funds from rights to import oil and gas. In the 1990s, Soeharto’s children had secured lucrative contracts from Indonesia’s state-owned oil company Pertamina. Soeharto’s son, Bambang, allied with broker Muhammad Riza Chalid, who operated through Pertamina’s Singapore and Hong Kong-based import subsidiaries Pertamina Energy Services (PES) and Pertamina Energy Trading (Petral). During the Yudhoyono presidency, Riza diversified his political risk by allying with new powerholders, including senior minister Hatta Rajasa, from the National Mandate Party (PAN) and General Pramono Edhie Wibowo, both related by marriage to the presidential family.

Such contests and scandals echo the dictum of British Prime Minister Lord Palmerston (1784-1865) that there are no permanent alliances, only permanent interests.

A note of clarification (24 May 2018)

When we refer in this blog to “control”, we are referring not to 51 per cent ownership in the usual equity sense but to overarching political control. Aluminium producer PT Indonesia Asahan Aluminium (Inalum) is a 100 per cent state owned enterprise (SOE) by Government Regulation 26/2014. Former Industry Minister MS Hidayat explained that once Inalum was nationalised by the Indonesian government, the government would determine whether there would be an allotment of shares for the North Sumatran government. President Susilo Bambang Yudhoyono referred the matter to his successor to decide upon. Apparently this has not yet proceeded.

Our use of the terms “control” (pengendalian or dikuasai) and “beneficial ownership” relate to Presidential Regulation 13/2018 about “beneficial ownership” and its application by Indonesia’s Corruption Eradication Commission (KPK) in relation to “politically exposed persons” (a euphemism for state powerholders).

In the reformasi era, the Ministry of State Owned Enterprises has been a prize ministry for the main party in every coalition government. Revenue/slush funds can be skimmed off in all kinds of ways and mobilised for party and presidential purposes. With an eye to the 2019 presidential campaign, President Joko Widodo’s allies have been careful to ensure that he controls this ministry and its key enterprises through his trusted ministers Rini Soemarno and Luhut Pandjaitan, thereby achieving financial independence from the Indonesian Democratic Part of Struggle (PDI-P) of which he is nominally a member but in a fraught relationship with its boss Megawati Soekarnoputri.

Based on analysis of Indonesian news and interviews with elite figures, we have tried to show from the cases of Riza Chalid and Luhut Pandjaitan how informal control of Indonesia’s oil imports and key state enterprises respectively are outcomes of intra-elite contestation. Riza has achieved a degree of political independence. Luhut has created a network around Inalum, Toba Sejahtra and Yayasan Del, which is able to mobilise funds for political purposes.

Our 2011 research article in the edited book ‘State and Illegality in Indonesia’ gives more detail on our approach.

Howard Dick is an honorary professorial fellow in the Faculty of Business and Economics at the University of Melbourne and conjoint professor in the Faculty of Business and Law at the University of Newcastle (NSW).